You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose b is equal to 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose b is equal to 2.0. What will be the new beta of the portfolio?
A) 1.12
B) 1.20
C) 1.22
D) 1.10
E) 1.15

Question

Quizplus · Accepted Answer

The new beta is calculated by adjusting the portfolio beta for the change in investment. The original portfolio beta is 1.15. By selling the stock with beta 1.0 and buying a stock with beta 2.0, the portfolio beta increases. The new beta is calculated as: (1.15 * 20 - 1.0 + 2.0) / 20 = 1.20.

You Hold a Diversified Portfolio Consisting of a $5,000 Investment